The images of post-flood damage are heartbreaking. In a matter of minutes, possessions that have taken a lifetime for many people to accumulate are swept away in a torrent of water beyond anyone’s control with the occupants of the property left temporarily homeless.
Those who survive a flood are grateful to have escaped with their lives. As for the material possessions, much of it can be replaced–but at what cost in high-risk floodplains and coastal areas?
That is at the heart of a debate that has continued in the aftermath of the Biggert-Waters Flood Insurance Reform Act, signed into law by President Barack Obama in July 2012. (See the Sidebar in Additional Content.)
The legislation received bipartisan support to move toward risk-based insurance rates. The legislation also called for the elimination of subsidies that kept rates down for homes in flood zones. Some estimates have the National Flood Insurance Program (NFIP) at more than $24 billion in debt in the wake of massive storms such as Hurricanes Katrina and Sandy.
The act also is designed to generate an estimated $2.7 billion increase in net income to the program over 10 years and encourage a greater role for the private sector in providing flood insurance coverage.
When the NFIP was created by Congress in 1968, its intent was to provide inexpensive subsidized insurance to protect against losses from flooding. It was viewed as an alternative to disaster aid to repair damage to buildings and their contents and was meant to be self-supporting.
Widespread flooding from Hurricane Katrina and subsequent storms threw the program into debt, with no unified agreement as to how to mitigate the problem. Economists and insurance experts have indicated the program needs to be overhauled to make it financially viable, with rates needing to be raised to address the debt and reflect true risk. Federal Emergency Management Agency (FEMA) is in the process of redrawing flood maps to better reflect risks.
Others–particularly property owners and those in the real estate industry–object to the raising of rates, or at the very least advocate having the changes roll out more slowly as the implications of the Biggert-Waters Act can be examined more closely.
Property owners nationwide are nervous as they eye FEMA’s map changes. The potential for steep flood insurance rate hikes–thousands of dollars a year for some–is expected to continue through 2014.
A further challenge for coastal homeowners is that federally subsidized flood insurance for primary residences will start to phase out by late next year, eventually forcing about 1.1 million property owners to pay the substantially higher full-market rates. That means paying higher premiums, mitigating properties to become more resilient, or engaging in buyout programs. In some parts of the country, such as the Shenandoah Valley in Virginia, buyout programs are in place to purchase and move or destroy homes at greatest risk. The land is then repurposed as open space upon which no building will occur going forward.
FEMA–which administers the NFIP program–has made clear that key provisions of the Biggert-Waters legislation “will require the NFIP to raise rates to reflect true flood risk, make the program more financially stable, and change how Flood Insurance Rate Map (FIRM) updates impact policyholders. The changes will mean premium rate increases for some–but not all–policyholders over time. Homeowners and business owners are encouraged to learn their flood risk and talk to their insurance agent to determine if their policy will be affected by BW-12.”
FEMA maintains a website for the Flood Insurance Reform Act of 2012 that provides ongoing information.
In its direct marketing mailings to homeowners, FEMA–on behalf of the NFIP–encourages homeowners to renew flood insurance policies based on several reasons, including these:
- Flood damage is not covered by most homeowners’ insurance policies.
- Flooding is the number one natural disaster.
- People outside high-risk areas file more than 20% of NFIP claims and receive one-third of disaster assistance for flooding.
- In high-risk areas, homes have at least a one in four chance of flooding over the course of a 30-year mortgage.
- Disaster assistance–if it’s available–has limitations and may not be enough to cover costs.
- Flood insurance is mandatory for those who live in a high-risk area and have a mortgage from a federally regulated or federally insured lender.
After the new rates were approved to reform NFIP, complaints came in from 27 states to reform the legislation, with those states’ Congressional representatives attempting to delay the law for four years while federal agencies complete an affordability study.
Others, keen on cutting the program’s debt immediately, tried to block attempts to delay the rate increases. Many in Congress reject the idea of continuing to subsidize through lower insurance rates for what they view as risky development in flood-prone places such as coastal Florida.
Joining them in their camp are some environmental groups concerned about environmental impact and risky building. They want to forge ahead with the new law, gradually phase out subsidized premiums, and base rates on actual risk.
Ray Lehmann, a Washington consultant who helped lawmakers draft Biggert-Waters, says that although there is concern about the law from Florida, Louisiana, and the New York–New Jersey area where rebuilding is occurring after Hurricane Sandy, he believes there is support for the law throughout the rest of the country.
More than 5.5 million property owners hold flood insurance policies. A 2011 financial analysis of the NFIP by the Wharton Center for Risk Management and Decision Processes found that more than two-thirds of the NFIP policies are located in five coastal states: Florida, Texas, Louisiana, California, and New Jersey.
Florida is one state that could be hard hit by potential rate increases. In that state, where two million property owners hold 37% of the nation’s flood insurance policies, lawmakers are heeding the strong opposition to rate increases by the real estate industry and property owners in low-lying areas.
Florida Governor Rick Scott has urged Senators Bill Nelson (D—Florida) and Marco Rubio (R—Florida) to adjust the NFIP’s impending rate hikes on the state’s property owners, warning the higher rates could negatively impact the state’s housing recovery. The governor says that under current law, the sale of any property or lapse of its policy removes the rate “glide path,” forcing the new or current owner to immediately pay full-risk rates.
In cases where new maps move a property into a flood zone, homeowners may find it impossible to sell the property to a new owner “who will be shocked with the massive premium increases required to secure a mortgage,” writes Scott.
“This unfair consequence could devastate parts of Florida’s real estate market, stymie Florida’s economic recovery, and diminish the state’s tax base,” he goes on to warn. “Furthermore, the NFIP’s finances may not improve as properties fail to change hands and participation in the program fails to materialize.”
Citing the $16 billion Floridians have paid into the NFIP over the past 35 years–four times the amount they have received in claim reimbursements–Scott contends that the state has done more than its “fair share” to make the NFIP sound.
Additionally, the state’s “superior coastal building code standards and leading efforts in the area of hurricane loss mitigation have further reduced the exposure for the NFIP,” the governor writes.
Scott argues that “Florida’s rates should commensurately reflect these important risk-mitigating factors.”
Pointing out that the House of Representatives passed an amendment to the Flood Insurance Reform Act in June 2013 mandating a one-year delay on rate increases, Scott urged Nelson and Rubio to take “immediate legislative action to ensure that the NFIP is improved in a way that is fair for Florida’s families.”
Floodplain mapping is confusing the issue for many. According to a report in the south Florida Sun-Sentinel in early December 2013, thousands in central Florida own property now considered risky, while thousands in south Florida are now in areas defined as less risky.
Of the state’s two million flood policyholders, most are already are paying the full-risk rate. More than 268,000 older Florida properties are still getting subsidized rates and are able to keep them until the properties are sold, but still face an average 16% rate increase because of an annual adjustment. Business properties, second homes, and frequently flooded structures will lose subsidies at a rate of 25% annually until they reach the full-risk premium, the newspaper reports.
The biggest increase comes for subsidized properties sold since the law took effect in July 2012. The ending of those subsidies has pushed up premiums for many properties from hundreds of dollars to thousands each year.
John Sebree, senior vice president for public policy for the Florida Realtors, points out that of the 37%–or $20 billion–Floridians paid in premiums for the NFIP since 1978, “we’ve had less than $4 billion paid back to property owners from the National Flood Insurance Program over that same time frame.”
In response, the state’s Realtors took three steps.
One was to join in lobbying Congress to delay implementation of Biggert-Waters. “That becomes difficult since most provisions of Biggert-Waters have already gone into effect,” says Sebree, adding that there had been a rally at the end of the final days of the 2013 session to try to get Congress to pass a four-year delay so it could consider phased-in reforms that are more affordable and “not the sticker shock that we’re seeing.”
In mid-November, the National Association of Realtors (NAR) testified before the US House Financial Services Subcommittee on Housing and Insurance that homeowners across the country should not be forced to pay for the “sudden and dramatic” flood insurance premium increases as a result of Biggert-Waters.
“We need a “˜time out’ from the implementation of the law,” said former NAR president Moe Veissi, broker-owner of Veissi & Associates Inc. in Miami. “No one could have imagined rate increases of this magnitude. During the debate over Biggert-Waters, the prevailing wisdom was that actuarial rates would range from hundreds to thousands of dollars, not tens of thousands of dollars or the 1,000% rate increase shocks that we are learning about now.”
NAR had advocated for the Biggert-Waters legislation to extend the program for five years and end the uncertainty of shutdowns stalling 40,000 home sales each month.
Due to the scope of premium increases and other unintended consequences, NAR recommended that Congress seize the opportunity to pass the Homeowner Flood Insurance Affordability Act.
The bipartisan Homeowners Flood Insurance Reform Act of 2013 would delay flood insurance rate increases for certain properties for up to four years until FEMA completes the affordability study, creates an advocacy office to investigate flood insurance rate increases, and reports to Congress with proposed solutions to identified problems. There also have been plans for amendments to include rate delays for small business and second homes.
In the interim, NAR calls on FEMA to convene a national summit with key stakeholders to develop a longer-term affordability solution.
Unwilling to wait for action on the national level, Florida Realtors have worked closely with Florida Governor Scott to file a friend-of-the-court brief in support of a Mississippi lawsuit against FEMA, joining Louisiana in the effort.
Mississippi sued in September, asking a federal judge to consider that FEMA was obligated to deliver an affordability study to Congress by past April but had failed to do so. About 17.4 million households in the US are in areas where flood insurance is mandatory, and 41% of those have low to median income levels, the lawsuit says.
The suit asks the judge to block rate increases until FEMA has done everything the law requires.
“They haven’t even started it,” says Sebree of the affordability study. “We feel like FEMA continues to argue that they have no alternative but to begin the rate increases, but in enforcing other provisions of the law, they seem to have chosen to totally ignore the affordability study.
“Members of Congress feel that if they had gotten the affordability study when it was due to us, they could have taken action to delay implementation but now the cat is out of the bag.”
The third measure is working with state legislators on Florida Senate Bill 542. The bill was introduced in December 2013 to promote a free market private marketplace option for flood insurance in Florida.
State senator Jeff Brandes (R–St. Petersburg) and Representative Larry Ahern (R–Seminole) announced flood insurance legislation that will provide alternatives to the NFIP’s rising rates in the wake of Congress’ delay of NFIP rate increases.
“Floridians deserve an alternative to the drastic rate increases of Biggert-Waters,” says Senator Brandes. “This legislation builds a framework for a Florida-based solution that gives flexibility to homeowners. This will put Florida at the forefront of addressing this issue nationwide.”
Representative Ahern says the flood insurance rate increases have a disproportionate impact on Florida and its housing market.
“We cannot wait for Congress to accomplish anything amongst the gridlock of Washington, but we can focus on private insurance solutions to increase competition and lower premiums,” he says.
The bill would allow homeowners to insure for the amount of their mortgage without mandating insurance that does not meet their needs, says Florida Senate President Don Gaetz (R-Niceville).
The bill provides a number of options from which policyholders can choose, including covering either the outstanding balance of their mortgage, the replacement cost of their property, or the actual cash value of their property.
“The goal is to create a much more vibrant flood insurance market,” says Sebree. “We feel maybe insurers aren’t certain what the lay of the land is. This will be more of a framework for doing that. I’m telling members of the Florida Congressional delegation the biggest favor they can do for us right now in the short term is get federal banking regulators on record telling us exactly what a state flood or a private flood policy needs to look like.
“The Biggert-Waters Act is very specific in that it states that lenders must accept private flood insurance that is of similar policy coverage as the NFIP is,” he adds. “We don’t think that word has really gotten out yet. Property owners need to know that they can shop around, but we also need to know there are products being written.”
The topic of private flood insurance came up at a recent US House Financial Services Committee hearing. In an exchange between Rep. Blaine Luetkemeyer, a Republican from Missouri, and FEMA Administrator Craig Fugate, Fugate pointed out that a federal flood insurance policy covers only $250,000, “so if you have jumbo mortgages, you’ve always had to go in the commercial, write over that. We’re insuring the greatest risk and the greatest liability at the least cost to anybody else, except for the taxpayer. They’re writing the piece of the risk that’s the least amount, and they can write very affordable [policies].”
Fugate also points out that a federally backed mortgage has required a National Flood Insurance Program policy, but that is being changed to allow any commercial policy that provides the coverage to the mortgage.
“It’s no longer exclusive to NFIP, which I support very much,” he adds. “Where we have seen the private sector engage in is the area that I’ve been trying to push to: can we get to the point where we’re not subsidizing rates, where they’re not going to write the least-risk areas, and begin taking on more and more of the responsibility, and literally move them back to a more of a capitalist, private-sector model of managing risk.
“But right now, we’re required to write the policies of service to federally insured mortgages. And when the rule change occurs, that’s going to open that market up. And I’ll be very interested to see how many more participants we’re going to have in writing insurance below $250,000 for that first amount.”
There is “terrible” uncertainty over flood insurance rates, Sebree notes.
“FEMA can’t tell us or a property owner that this map is going to go into effect on a certain date, so if someone is looking to buy or sell a property, they don’t know if they’re going to be quoted on a current map or a new map,” he adds.
Sebree agrees with Governor Scott that there is a potential negative impact on Florida’s economy from the potential NFIP insurance rate hikes.
“We’re at this time where we’ve had more than 20 months in a row of increases in home prices,” he says. “We’ve had such a positive trajectory on home sales numbers and it’s not just a blip on the screen. Florida is bouncing back in a big way and it’s such a shame in a time when it’s bouncing back there could be something like this that could take the steam out of that, at least for parts of the state.”
The Florida Association of Counties is working on a policy paper that would recommend affordability and mitigation strategies for consideration in Biggert-Waters reform efforts while advocating for a delay.
After Biggert-Waters was signed into law, efforts kicked into gear to begin reforms, with a focus on the skyrocketing flood insurance premiums, which the act’s cosponsor, Rep. Maxine Waters, a Democratic from California, called an “unintended consequence.”
FEMA Administrator Fugate has defended in hearings FEMA’s implementation of Biggert-Waters and the agency’s work on an affordability study required by the law, although he has not committed to a completion date for the study.
Congress would need that study to consider any plan to delay rate increases moving forward, according to the Florida Association of Counties.
Fugate also has emphasized NFIP cannot subsidize going forward and that at some point, insurance rates “have to reflect the real risk of flooding in order for the program to be actuarially sound.”
Florida’s politicians are joined by those in flood-prone states such as New York, New Jersey, and Louisiana in offering amendments and bills to extend the time frame in which higher rates would go into effect.
NBC News reported in September that thousands of New York and New Jersey homeowners impacted by Hurricane Sandy are facing tough choices in their rebuilding efforts: comply with costly new federal construction guidelines–such as elevating their properties on pilings–or prepare to pay annual flood insurance rates that could exceed $20,000 slated to take effect by mid-2015. Or just leave their properties behind.
New federal flood maps released in June show that 68,000 structures in New York City and thousands more in New Jersey are in flood zones. Hurricane Sandy’s strike on October 29, 2012, damaged or destroyed 365,000 homes in New Jersey and 20,000 in New York City. The region’s flood insurance maps are expected to become final by mid-2015, putting new insurance premiums into effect.
Some are fighting the efforts to raise rates. A July 2013 story in the New York Times reported that Brick Township, NJ, officials have paid a mapping expert to obtain certification in floodplain technology to challenge the FEMA’s new flood maps.
New York Mayor Michael Bloomberg’s office said at that time that by the 2050s, some 800,000 New Yorkers would live in the 100-year-floodplain–a figure that is more than double the current numbers. Some estimates target 20,000 New York homes for significantly higher premiums.
After the storm, Bloomberg set up a Special Initiative for Rebuilding and Resiliency, which calls for such measures as amending Biggert-Waters to enable residents to buy cheaper insurance with higher deductibles.
The initiative also promotes the idea of FEMA offering financial credit to those who renovate their properties for resiliency through such measures as moving boilers from the basement to the first floor.
For now, the only way to obtain lower rates is to raise a home above certain elevation levels, which may not be possible in places such as New York with housing stock that is old and homes that are attached to adjacent buildings.
Greater New Orleans is a public-private group promoting economic development in a 10-parish region in Louisiana. Its Coalition for Sustainable Flood Insurance “is working every day to find a permanent solution to drastic premium increases,” notes Caitlin S. Berni, director of external affairs for Greater New Orleans.
“Our coalition supports a fiscally sound, actuarially responsible NFIP that communicates true risk to our citizens,” says Berni. “None of us want perverse incentives for building in harm’s way, nor do we advocate for the continued subsidization of severe repetitive loss properties. However, we have a moral and economic duty to protect property owners who have played by the rules and built as their government told them. They should not lose their homes and businesses.”
Berni points out that 55% of Americans live within 50 miles of the coast. “Our nation’s economy depends on living near the water. NFIP’s problem isn’t that it’s a program that is subsidizing vacation homes–it’s a program grossly mismanaged by FEMA,” she says.
Resilient communities and mitigation are long-term keys to the economic vitality of America, says Berni.
“Floods are the fires of 100 years ago,” she adds. “While fires used to take out whole towns 100 years ago, America invested heavily in mitigation, and in large part it has worked. We need to focus on mitigating from floods in order to truly be protected in the future.
“Also, the current program does not incentivize property owners for mitigating, because homeowners have no protection from rate spikes even if they mitigate their properties.”
Greater New Orleans’ Coalition for Sustainable Flood Insurance supports the entry of the private market into the flood insurance realm, Berni says.
“Competition from the private market may be the permanent solution to affordable flood insurance,” she adds.
The Association of State Floodplain Managers (ASFPM) estimates the initial cost to provide flood mapping for the nation to be from $4.5 billion to $7.5 billion, with the cost to maintain those maps ranging from $116 million to $275 million annually.
The US has invested $4.3 billion in flood mapping to date “and has enjoyed multiple benefits from that investment, including providing the basis for guiding development that saves over $1 billion a year in flood damages,” an ASFPM report states.
“This national investment in a comprehensive, updated flood map inventory for every community in the nation will drive down costs and suffering of flooding on our nation and its citizens, as well as providing the best tool for managing flood risk and building sustainable communities.”
Flooding is a predictable risk “in the sense that we can identify where in the nation flooding will occur,” states ASFPM. “It is a manageable risk–there are established actions that individuals, businesses, and communities can take to reduce potential damage–provided the flood risk areas are identified.”
Flooding continues to be the nation’s costliest hazard, with average annual losses now averaging more than $10 billion, the association points out, adding that losses continue to climb.
“More than one million miles of streams, rivers, and shorelines have been mapped at a total cost of over $4 billion,” states ASFPM. “Yet we still have areas that have no flood maps, areas that have outdated flood maps that haven’t been updated, and areas with older engineering studies that need to be updated. And there are other flood hazards that need to be identified.”
A recent report on the NFIP identified the lack of understanding of the national flood risk, the inadequate communication of that risk, and diminished capabilities in flood risk management due to inaccurate or out-of-date flood hazard maps as current major weaknesses in the program, according to ASFPM.
That 2011 report by the Congressional Research Service also concluded that reliable flood risk data, including updated flood maps and educating residents about flood risk, contribute to mitigating future flood losses.
“A comprehensive, updated national flood map inventory can drive down the costs and the impacts of flooding on our nation and its citizens,” states the ASFPM report.
Larry A. Larson, P.E., CFM, director emeritus and senior policy advisor for ASFPM, says for those whose properties are affected by changes in the new flood maps and fear the changes would lower their property values or make it more expensive to get insurance, it likely will lower the assessed value to reflect true risk rates.
“This provides the homeowner with the opportunity to evaluate the return on investment for investing in mitigation, such as elevating the home,” he says. “Once mitigated, the value of the home will be retained because the premium will be greatly reduced, likely to the previous level or lower.”
Larson contends that many areas affected by severe weather events such as Hurricane Sandy can be rebuilt.
“But it is important to mitigate while rebuilding,” he adds. “High-risk areas should consider buyouts, which is happening in many areas throughout the nation. FEMA has acquired more than 38,000 structures after disasters, with 75% of that funding coming from federal mitigation programs.”
The ASFPM “No Adverse Impact” initiative promotes this and other mitigation programs, he adds.
Addressing initiatives to privatize the insurance as has been proposed by Florida, Larson says, “There is likely a place for private sector involvement in flood insurance, either in direct sales or perhaps more appropriately in reinsurance. We have seen some private sector offerings for flood policies, but often these appear to cherry-pick low-risk policies. This entire area of private involvement is evolving.”
Another factor relevant to the discussion is how stormwater is managed. To that end, Congress passed the Water Resources Reform and Development Act in 2013. The Act promotes investment in the nation’s critical water resources infrastructure, accelerates project delivery, and reforms the implementation of US Army Corps of Engineers projects. Among its many provisions, the legislation authorizes projects with completed Chief of Engineers reports that have been referred to Congress by the Assistant Secretary of the Army for Civil Works by the date of enactment.
Currently there are 18 projects, including flood risk management, navigation, hurricane and storm damage risk reduction, and environmental restoration. The average annual benefits of the flood and storm risk management reduction projects exceed $690.3 million.
Project delivery reforms include increased flexibility for non-federal sponsors of Corps projects and accelerate project delivery. The bill also establishes a new program to promote levee safety and improves inland waterways project delivery.
In 2013, the US Government Accountability Office reported two risk areas to its previous “high risk” list with respect to the NFIP. The GAO acknowledges that while the program is a key component of the federal government’s efforts to limit the damage and financial impact of floods, it is unlikely to generate sufficient revenues to repay the billions of dollars borrowed from the US Treasury to cover claims from the 2005 hurricanes or future catastrophic losses.
The GAO points out structural weaknesses in how the program is funded, which the agency says would be addressed to some extent by Biggert-Waters.
“The extent to which the changes included in the act will reduce the financial exposure created by the program is not yet clear,” indicates the GAO in a 2013 report. “Weaknesses in NFIP management and operations, including financial reporting processes and internal controls and oversight of contractors have also placed the program at risk.”
Although FEMA has taken some steps to address those issues, it confronts complex challenges, according to the GAO. “In October 2012, Superstorm Sandy caused extensive damages in several states on the eastern coast of United States, raising the prospect that NFIP would not be able to pay all the resulting claims without borrowing additional funds from the Treasury,” the GAO reports, adding that in January 2013, Congress passed legislation to temporarily increase NFIP’s borrowing authority from $20.7 billion to $30.4 billion to address these claims.
The GAO added two risk factors to its list of concerns regarding the NFIP. One is in limiting the federal government’s fiscal exposure by better managing climate change risks.
“Climate change creates significant financial risks for the federal government, which owns extensive infrastructure, such as defense installations; insures property through the National Flood Insurance Program; and provides emergency aid in response to natural disasters,” the GAO points out. “The federal government is not well-positioned to address the fiscal exposure presented by climate change and needs a government-wide strategic approach with strong leadership to manage related risks.”
A second area: mitigating gaps in weather satellite data. Potential gaps in environmental satellite data beginning as early as 2014 and lasting as long as 53 months have led to concerns that future weather forecasts and warnings–including warnings of extreme events such as hurricanes, storm surges, and floods–will be less accurate and timely. A number of decisions are needed to ensure contingency and continuity plans can be implemented effectively, the GAO points out.